Tuesday, May 5, 2009

The Black Swan

To say that I enjoyed this book is not an accurate statement. I found it interesting and irritating. I’ve been telling people that it’s a book I loved to hate, although even that’s not correct. Reading it was difficult but I was pulled along by insights that appeared every ten pages or so. It’s basically a one concept book – the prevalence of what he calls “Black Swans” in a lot human systems that occur more frequently that Gaussian statistics would lead one to believe, with large impact. He defines Black Swans, “A Black Swan is a highly improbable event with three characteristics: It is unpredictable; it carries a massive impact; and after the fact, we concoct an explanation that makes it appear less random, and more predictable than it was.”

He draws together knowledge from many different fields to build his model, and that’s a good thing. However, he quite often uses uncommon words and references that sometime make his writing hard to understand.

Taleb has four sections to the book: how we seek validation, we just can’t predict, those gray swans of extremistan and the end. (Mediocristan and Extremistan are his two words for the tame, quite and uneventful, and Black Swan generating provinces.) He writes constantly about the unpredictable and the unhooking of cause and effect.

Unfortunately for anyone writing about what he calls extremistan, by the very nature of writing is using the principles of mediocristan, and in this case the structure of the book roughly follows the four causes of reality described by Aristotle.

The author falls victim to some of the very things he’s trying to write against. The Western world has known for some time, and the Eastern world for a long time, that the two conditions do not exist in an either-or, but a both-and world. Mediocristan and extremistan exist at the same time. However, it is wise to not ignore one over the other.

Taleb often writes against the uses of story or narrative. However, he validates all of his assertions through anecdotes himself.

Some of the statements in the book that frustrated me:

* His writing makes it seem that Gaussian statistics is to blame. It’s not; it’s the application of Gaussian statistics to human systems that is wrong. Gaussian statics work very well for the physical systems they were created for.
* He states repeatedly that all important progress is created by Black Swans, and that’s not true. For every Black Swan there are thousands (perhaps millions) of incremental and distinctive changes that keep the engines of society running before they “run out of gas”, and there’s a need for a Black Swan.
* The future is unpredictable and futurists are charlatans. This not true in general. For some “utility functions” the rate of change function for the “utility function” can be determined, and that function remains the same for many years allowing predictability.
* Black Swans are not random, but they are not predictable.
* The probability of an event occurring, including Black Swans, can be determined, but the time when the event might happen cannot.

Everything the author writes about can be explained with the help of complexity science.

I agree with the author that random events or small changes in initial conditions can shape the outcome of a process. This after all was how complexity science was discovered by Lorenz in 1961, and famously named the “butterfly effect”. This is right at the heart of two versions of how the future is created. Is it out of the impact of significant events or important persons? Or, is the result of societal forces? Would we have the information industry we have if we did not have Bill Gates, Steve Wozniak and Steve Jobs? Of course we would. Others would have emerged to move the technology and industry along because they both have a utility for society.

And, the author is correct in that we are cause seeking beings. We couldn’t have forecast that any one of the three people mentioned above would have accomplished what they did. But, after the fact, we create a history of how they accomplished what they did, and then tell others to emulate that story. However, we did forecast correctly the widespread diffusion of semiconductor and information technologies.

We can’t forecast from a part of a tree seed what specific leaf will result. But, we can start with a specific leaf and trace it back through the twigs, branches and trunk back to the base of its trunk.

The most valuable part of the book is on risk and investment strategy. In it, he balances mediocristan and extremistan.

My guess is that he was writing this book for the financial idiots who got us into our current economic malaise with their repeated use of modified Ponzi schemes, ignorance of history, misuse of statistics and blindness to Black Swans. For that I applaud his efforts. I wish that he could have been more influential, and influenced the process in its early stages before it produced the Black Swan we are living in, and that our children and grand children will have to pay for.

The Black Swan: The Impact of the Highly Improbable
Nassim Nicholas Taleb, Random House, 2007, 366 p

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